CFPB adopts examiner guidance on payday lending to servicemembers

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau has updated its payday lending examiner guidance to add a focus on loans to servicemembers. Under the new guidance, examiners will look specifically at lenders’ compliance with the Military Lending Act (MLA), which sets special requirements for short-term loans to active duty servicemembers and their dependents. The new examination procedures manual updates the CFPB’s original manual issued in January 2012.

According to the CFPB, the MLA was enacted in 2006 in response to a Defense Department report finding that predatory lending practices near military bases were a threat to servicemembers and their dependents. The CFPB has the authority to enforce the MLA and does so under a joint statement of principles between the bureau and the Defense Department.

Under the MLA, lenders making loans of no more than $2,000, for terms of no more than 91days, are subject to the following requirements:

The annual percentage rate cannot exceed 36 percent.

A loan cannot be rolled over unless the transaction results in terms that are more favorable to the servicemember.

A servicemember cannot be required to waive rights under the Servicemembers Civil Relief Act or other federal or state consumer protection laws. He also cannot be required to waive his right to sue, as opposed to arbitrating disputes.

A servicemember cannot be required to arrange for repayment of loan through the allotment system, which would result in a deduction from his pay.

MLA effectiveness. While the CFPB now has the authority to enforce the MLA, the authority to adopt implementing regulations remains with the Defense Department. A recent study by the Consumer Federation of America (CFA) charged that 29 percent of U.S. servicemembers live in states that permit payday loans that should be, but are not, prohibited by the MLA due to gaps in those regulations. According to the CFA, lenders can avoid the effects of the Defense Department regulations simply by making loans for more than $2,000 or longer than 91 days.